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Starbucks (NasdaqGS: SBUX - news) has taken the “unprecedented” step of pledging to pay £20m
corporation tax, even if it makes no profit only for the move to appear to
backfire and fuel the fiasco surrounding its UK operation.

In a bid to end the pressure on the coffee chain, the US giant dramatically
broke off talks with HM Revenue & Customs (HMRC) to offer to “pay or pre-pay
somewhere in the range of £10m in each of the next two years”. Starbucks has
paid just £8.5m corporation tax in 14 years, despite UK sales of £3bn a
tax rate of less than 1pc.

Kris Engskov, managing director of Starbucks UK, admitted that the payment
plan was an “unprecedented commitment” and that he had not yet “shared” the
idea with HMRC. While keeping its tax arrangements unchanged, Starbucks said
it would “not claim deductions” it has been taking for royalties to its
Amsterdam office, inter-company loans, capital allowances and coffee
purchases.

Starbucks was “taking action to pay corporation tax by not taking those
deductions any longer”, he said, adding that the company had been shocked by
the “emotional” reaction of its customers to the tax row.

On Thursday night, however, tax experts described the company’s payment
proposals as “commercially gobsmacking”, while politicians warned that the
move underscored the view that the UK’s tax system is being treated as a
“complete joke”. Even tax campaigners at UK Uncut dismissed the move as
“just a desperate attempt to deflect public pressure”.

Patrick Stevens, President of the Chartered Institute of Taxation, said: “If
Starbucks is saying its current tax arrangements are all agreed with HMRC,
then in commercial terms, it is making a gift to the Government, not paying
tax. It’s gobsmacking really.” He warned that the precedent could create a
two-tier tax system in Britain. “Will we have a payment level of companies
that sell to the public, particularly with younger customers, and then
another level of tax for the rest? It’s shown the flaws in the UK system.”

Stephen Williams, Treasury spokesman for the Liberal Democrats, said: “It is
extraordinary. People have been joking that some of these multinationals
seem to think that paying tax is voluntary. Well, Starbucks have just
confirmed the joke really. Tax is something that is a legal obligation that
you should pay. It’s not a charitable donation in order to gain brand value.”

A spokesman for HMRC said: “Corporation Tax is not a voluntary tax. HMRC will
challenge, through the courts if necessary, any structures or tax payments
that do not comply with UK tax law.”

Margaret Hodge, chairman of the Public Affairs Committee, said Starbucks had
taken a “first step in the right direction” and she hoped Google (NasdaqGS: GOOG - news) and Amazon
would “follow suit”.

Mr Engskov maintained that Starbucks’ low corporation tax payments had been
because the company had “not been as successful over our 14 years in the
UK”. On Thursday night, he was confronted with Starbucks’ accounts for 2011
that stated the UK was one of four key foreign markets upon which the
company relies for a “significant portion of net revenue and earnings”.

But Mr Engskov told Sky News: “We are not profitable in the UK.” A company
spokesman said the annual report “does not assert that the UK [business] was
individually profitable”.

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